Scientists: 7 Ways How to Avoid Biotech Employers That Are Likely to Go Financially Bust

Working for a biotech startup can seem like a dream job for a lot of young scientists—cutting-edge research, exciting environment, potential big money if your stock options take off. Who doesn’t envision themselves as a Steve Jobs or Bill Gates of biotech?

And it’s true, despite probable long odds, biotech startups tend to be scrappy little companies with fresh ideas, venture capital and lots of energy and enthusiasm.

It’s also true that biotech startups can be volatile. Big pharma is reasonably stable, although according to a Science article, between 2002 and 2012, the pharmaceutical industry lost about 300,000 jobs, many of them chemists and scientists. But a lot of that was due to merger-and-acquisition (M&A) activity. “Stable” can be a relative thing, but biotech startups are typically more volatile than big pharma.

Keep in mind that a key question asked of biotech startups is, “How long is your runway?” What does that mean? It means: how long your company’s money will last! If you have $15 million in venture capital funds, a dozen employees, facilities and equipment, how long will that money last before you’d better have something that will attract more investors or buyers?

As Ellen Clark, president of Clark Executive Research, told BioSpace, “Biotechs are still a risky game. They have one or two things, then the trial fails and boom, they fire everybody, although upper management manages to make it.”

With that in mind, how can scientists evaluate a biotech company in terms of its business?

1. Good science.

For the most part, good science makes for good commercial products. Presumably, with a thorough scientific education, you’ll be able to look at a biotech company’s science with not only an eye for the quality of the science, but its commercial applicability. Stephen Jackson, founder of Kudos Pharmaceuticals, was quoted in a 2007 New Scientist article, saying, “You can go into a car showroom and know some cars are better quality than others just by looking at them. In the same way, if you’re a scientist in the appropriate field you will normally have a very quick response as to whether something is good or not—it’s instinctive.”

2. Look at the managers and investors.

Very often, in startups, the executive management team is made up of a combination of partners in the venture capital firm or firms and, with any luck, experienced executives who have industry experience — sometimes they’re both. It doesn’t take a lot of time and effort to look at who these people are, what their backgrounds are, and more importantly, what their success rate has been. If the chief executive officer of the company had previously founded three or four biotech companies that either went on to be successful standalone companies or were acquired by larger companies, that’s a definite indication they know what they’re doing. And although there can be some “me-too” excitement that gets venture funds jumping into projects, most often the bigger the money, the more likelihood the science is good. Most VCs have a good idea of what’s good and are likely to earn back their investment, and if a dozen investors are willing to invest $10 million each, that tends to be more positive than two investors willing to invest $5 million each.

3. Earnings reports.

Some biotech startups—particularly fairly new ones with venture capital funding—are private and you won’t have access to any past earnings reports. However, if they are public companies, and many are if they’ve been in business for some time, their earnings are public and can be found on their company websites, either in the Investors sections or the News section, or on the Securities and Exchange Commission website. There’s often a lot of useful information in an annual report, but sometimes it’s buried—footnotes can often help parse the data if things aren’t completely obvious. Factors to evaluate are revenue, if there is any, expenses, sometimes listed under operations, as well as cash and cash equivalents, which will give you a sense of the company’s runway, and earnings per share (EPS). It can also be useful, if the company has been public, to take a look at how its stock has performed. A stock that launched at $14 per share, but promptly dropped to $7 and has been trending at $1.99 for the last year could be in trouble—unless there’s evidence of a positive Phase III clinical trial coming up or some other potential catalyst.

4. M&A.

A very common trend in biotech companies is to develop a promising drug, get it into the clinic, and if it’s promising enough, the company gets acquired by a larger company. This is a good news/bad news thing. It’s possible that if you have stock options (more about that later), you’re suddenly worth a lot of money. It’s also possible that the larger company is primarily interested in the drug, not the staff, and you will be redundant.

Jackson, whose Kudos was acquired by AstraZeneca (AZN), said, “If a company has just one thing—a product—then you can imagine that’s very moveable, but if a company has got expertise in discovering and developing drugs or medical devices then why would you want to break up a winning team?”

5. Pipeline and Portfolio.

Related in a way to #4, is what’s in the company’s pipeline, or, if it has products on the market, what is also in its portfolio? A company with only one or two products in its pipeline is risky. On the other hand, a company with a hot product and a solid pipeline isn’t immune from being acquired — recent examples include Pfizer's (PFE) acquisition of Medivation (PFE) and Johnson & Johnson's (JNJ) acquisition of Actelion (JNJ). But the J&J deal is an interesting case from the point of view of this discussion, because J&J was getting Actelion and its marketable drugs, but the Swiss company’s research-and-development pipeline was being spun off into a new standalone company.

6. Location, location, location.

In the U.S., the two biggest clusters of biotech startups and biopharma companies are in Boston and San Francisco. That isn’t to say there aren’t plenty of other biotech companies around the country, but the biggest concentrations are in those two areas. BioPharmGuy lists 85 biotech companies in Michigan, most in Ann Arbor, home of the University of Michigan, or in surrounding suburbs, for example. But MassBio indicated in 2015 there were more than 900 biopharma, medical device and diagnostic companies in Massachusetts. And BioPharmGuy lists more than 830 biotech companies in the Bay Area and Northern California. Michigan’s a nice place to live and a whole lot cheaper than Boston and San Francisco, but for biotech jobs, there’s a 10 to 1 ratio of available companies to work for in the two big regions to take into consideration.

There are advantages to being in an area where there are a lot of industry jobs. Mobility is one, and that also includes not just wanting to change jobs, but needing to if your company implodes. It also allows for easy networking with peers.

7. Stock Options.

That’s part of the dream, right? You join a hot new startup and they offer you stock options. Then the company develops the next Humira, Spinraza, Zoloft or Viagra, and you’re suddenly a millionaire—along with having a cool job.

Time to take a deep breath and really ask yourself: Do you completely understand the stock options?

To sum it up, he points out, “Stock options are nice to have, but keep them in perspective.” Because, as this article has tried to reinforce, biotech companies go belly up—it’s a volatile industry. And if the company fails, the stock options are worth nothing.

But, Timmerman also said, “What fewer people realize is that startups can be successful, and still not provide stock rewards to the people who slaved away all those nights and weekends to make it a success.”

Because there are different types of stocks, and preferred shares that venture capitalists hold are different than the common shares typically held by founders and employees. “There’s a whole confidential world of liquidation preferences,” Timmerman wrote, “and things like participating payout clauses, that are quite relevant to the financial futures of startup employees, and yet hardly anybody knows anything about it.”

So if you’re offered shares in the company, do some research to completely understand what you’re being offered. You might not be getting what you think you’re getting.

Working for a biotech startup can be a highly rewarding and exciting career. But drug development and business startups—in any business—are a gamble. Doing a little bit of due diligence can improve your odds of working for a great company.